On the surface, British politics appears to have turned on its head. Tory chancellor of the exchequer George Osborne surprised all recently by grabbing an issue from the Left and calling for Britain to adopt a national living wage (NLW). Even stranger, the move prompted resistance from the Left, sometimes with arguments traditionally used by the Right. The Guardian, a left-leaning organ if ever there was one, has gone so far as to remind its readers that a high minimum wage can constrain job prospects for the most vulnerable, while benefitting second earners in sometimes well-off families. What’s going on here?
A little digging offers some perspective. It is, after all, not the first time that this Tory leadership has attempted to stymie its opposition by stealing a political issue. Prime Minister David Cameron’s push for a referendum on Britain’s EU membership did just that to Nigel Farage’s right-wing U.K. Independence Party (UKIP) ahead of the 2015 general election. But even apart from political ploys, a closer examination of the government’s budget reveals that the NLW is more classically Tory—and less left-leaning—than it first appears. In fact, the NLW is an integral part of a general plan to curtail welfare and other government support programs and instead promote work, productivity, and the expansion of British businesses.
Taken in isolation, the NLW looks like a classic left-wing policy. It raises the minimum wage from £6.70 ($9.72) an hour to £7.20 ($10.44). Given the U.K.’s low rate of inflation, this 7.5 percent jump constitutes an impressive increase in real wages. The NLW will gradually rise an additional 25 percent, to £9.00 ($13.05) an hour by 2020. The objective, Osborne says, is to boost the minimum wage to 60 percent of Britain’s median wage, making it the highest relative minimum in the world. The government estimates that these changes will benefit some 6 million workers.
Whatever else the Tories intend, the wage hikes will have the usual ill effects on employment. Already, British employers have taken steps to ease the strain on their respective bottom lines, variously cutting back on worker perquisites, overtime, and Sunday pay. British employers will doubtless seek further relief by shedding workers whose productivity falls short of the new higher wage, either by scaling back their businesses or by replacing workers with labor-saving equipment. This sort of shift has already occurred in the United States, where states and cities have suddenly imposed new, higher minimum wages. In Britain, the nonpartisan Office of Budget Responsibility estimates that in its initial phase alone, the NLW will cut at least 60,000 jobs out of a workforce of about 30 million.
The projected job losses would have been greater had Osborne’s measures not included an important nuance. Until now, the nation’s minimum wage applied only to workers over 21—a recognition that a high minimum wage can block job prospects for younger workers. Government publications have repeatedly pointed out that more than half of young workers earn the minimum, while only about 5 percent of the overall workforce does. Building on this recognition, the new law applies the higher minimum wage to workers 24 or older. A lower minimum will prevail for those between the ages of 21 and 24, and still lower minimums for younger workers. All wages will rise from last year’s levels, but the youth minimums will increase along a shallower slope than the NLW.
This careful attention to employment effects points to the general pro-work, pro-productivity focus of the Tory government. Cameron and Osborne have eased the strain of higher wages on business, and presumably on employment levels, by allowing shops to stay open for longer on Sundays and, critically, by slashing corporate tax rates from 28 percent to 17 percent over the next four years. They have bolstered small businesses by reducing their national insurance contributions.
Having given employers the wherewithal to pay higher wages, the NLW law also aims to push the population toward work and away from government support. Higher minimums, of course, make work more attractive. So does the law’s provision to increase by some 13.6 percent the amount a worker can earn before having to pay income tax. To reduce the attraction of government support, the law limits child tax credits to only the first two children, freezes the amount paid in jobless benefits, pays less to the disabled, and caps at lower levels the total benefits that a family can claim. The law also ends the option young people have had—and some exercised—to move directly from school to jobless benefits. Now, those between the ages of 18 and 21 will either go to school, enroll in a training program, or find work.
The concern shown for Britain’s relatively high proportion of low-wage workers speaks to a laudable desire to upgrade the skills and productivity of the average British worker, moving the nation’s economy toward production of more complex, higher-value goods and services. To this end, the law leans on employers to dedicate more resources to training.
Whether the NLW and Osborne’s other measures will prove successful remains to be seen. Clearly, they differ substantially in character from the $15 minimum wage that some American cities and states have implemented recently, and which reflect a prevailing illusion—that government can force businesses to pay workers more than they produce.
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